The Dynamic Value Chain: Quickly Reducing Complexity
Dynamic value chain management (DVCM) is a business methodology that helps companies manage marketplace variability and complexity and align company strategies with execution processes. DVCM helps transform a value chain into a more effective collaborative model — a model in which companies interact across the key processes of sourcing, procurement, product design, manufacturing and fulfillment. By using technology to monitor variability and complexity, to decide on the right courses of action, and then to act rapidly on those decisions, businesses can better keep promises to their customers and deliver the right product, at the right price, at the right time.
Business conditions may change, but business fundamentals do not. Companies always try to provide the best products at the lowest possible cost. Traditionally, they lower costs by tweaking their internal processes so that they begin to operate more efficiently. Or they may also increase their size, through growth or acquisition, and use that size to create the kinds of efficiencies needed to lower costs.
But in today's environment, with thin margins, escalating costs, and fierce competition for the customer's dollar, the efficiency of a company's internal business processes or its market leadership don't necessarily guarantee success. Instead, what provides a competitive advantage is flexibility — the ability to react quickly to changes in the marketplace and to adapt quickly to meet the needs of customers, while following and aligning with the strategic objectives of the corporation. And this has created a need for a new industry concept: Dynamic Value Chain Management.
Combating Variability and Complexity
DVCM is a business methodology, much like Total Quality Management, or TQM.
Where TQM addresses the issues of reliability and quality as they relate to
delivering products to customers, DVCM reduces and manages complexity and variability
by increasing responsiveness and flexibility across organizational "silos" through
superior visibility, decision-making, and coordination.
The way each partner in a value chain handles variability and complexity determines
how successful the overall value chain will be among competing value chains.
For example, if a business wrongly anticipates the needs of a customer, or if
those customer needs suddenly change, the business will use its assets to produce
something the customer no longer wants. That leads to lower customer satisfaction.
Variability is what causes businesses to work on the wrong things or to produce
the wrong products at the wrong times. Of course, variability strikes a business
not only from the customer side, but from the supplier side as well. For instance,
a supplier may not be able to provide items a business needs. Or perhaps the
supplier can deliver necessary items, but only a month from now and not in two
weeks, when a company really needs them.
Successful companies reduce variability by managing complexity. That is, they are able to reduce the number of suppliers (often building stronger relationships with select suppliers), reduce the number of parts (many of which are duplicates or more expensive than other similar parts), reduce the number of Bills of Materials (many of which are duplicates across the corporation), reduce the number of finished goods (some of which overlap with other finished goods), and so forth. Doing so is critical for achieving the velocity needed to compete effectively. And managing complexity also helps companies tremendously reduce costs and operate much more smoothly.
Most companies aren't equipped to deal with reducing variability and managing complexity within the organization, or as part of daily supplier and customer interactions, because they manage by looking into the past rather than at the future. This is like driving while looking in the rear-view mirror. This can be done on a straight road at slow speeds, but today's business requires companies to execute quickly, while never knowing when a curve in the road ahead could appear. DVCM systemizes the process of looking into the future, making decisions, and taking action — all at the speed of business.
Responding to Constraints
The first product i2 created was a solution designed for factory planning. It answered such questions as "What is the best sequence to manufacture items in a factory?" and "What plant should be used to manufacture a specific item?" i2 applied the theory of constraints to the planning process, which essentially gave factory planners the ability to weigh real-world tradeoffs.
DVCM is also based on constraint theory. By managing constraints, such as material shortages or delays, each member of the value chain can stop losing value - both within their own company as well as with their trading partners. For this to be successful, businesses must first be able to identify and monitor constraints that are affecting the value chain. Next, they must make decisions within their business about what to do. And finally, they must act rapidly on their decisions. This monitor-decide-act loop may well include sharing decisions that affect their respective customers and suppliers, and can reclaim the value being lost through untimely decisions or failure to take corrective action. The loop then starts again, in a continuous cycle of monitoring, deciding, and acting.
The Three Phases of DVCM
In the monitoring phase of the DVCM loop, businesses monitor decisions and events happening both inside and outside the company. Of course, it's impossible to monitor all variables; the amount of information involved would be unmanageable. Instead, businesses need to identify and monitor the most important variables - the ones that have the biggest impact on the utilization of critical resources, where timely decisions and action can really improve results, and that support the strategic objectives of the company. This same monitoring process must also look outside the business, identifying situations caused by suppliers as well as by customers that can result in potential value loss for all partners in the value chain.
In the decision-making phase of the DVCM loop, businesses focus on "what-if" questions with their suppliers and customers. Questions such as, "What if demand spikes next month to twice that expected? Is there still enough supply?" or "What if the customer decides he wants the product in a different color? How quickly can the supplier respond?" By taking into account constraints from suppliers and related value-chain partners, businesses can provide a reliable commitment to their customers.
Figure
1 - The Three Phases of DVCM
The final phase of the DVCM loop is acting on intelligent decisions made earlier. This execution phase occurs in multiple stages, both within and outside a company, and it recurs continuously with multiple participants. To complete the loop, companies must monitor execution and embed decision support into the execution of sound business processes. For example, if something unexpected delays execution of a customer order, the monitoring process must detect this variability so that another intelligent decision can be made and acted upon before the unexpected becomes a real problem. The most successful businesses will be those that recognize variability and actively manage complexity earlier than their competitors, and that are able to intelligently decide and act in a timely manner, even though all members of the value chain may not actively participate.
Achieving Velocity is the Key to Success
To bring a product to the customer, a company must work with many organizations,
both internally and externally. These organizations need to communicate decisions
amongst one another in a timely and effective manner. Unfortunately, even within
a single company, there are organizational silos that don't communicate well.
And even when they do communicate, the information they deliver can be weeks
late. By the time other parts of the organization receive the information, demand
has changed, and as a result, everyone is working on the wrong products. This
is known as the "bullwhip" effect, where a small variability in one place results
in a huge variability at one or more other places, because of the time lag.
What could have been a small, easily corrected problem, if detected early enough,
turns into a major problem when it remains
undetected until the last minute.
Velocity is the key weapon against variability and complexity. The faster a business discovers information, decides a course of correction, and acts upon it, the less likely it is that a bullwhip effect will be created. The DVCM loop of monitoring, deciding and acting combats variability and complexity. With better monitoring, businesses spot variability and identify areas of complexity more quickly. Businesses can use real-time data and high-speed Internet collaboration tools to get the information they need to decide how to deal with the problem - which organizations to involve, which products to make, which suppliers to use, and so on. Businesses can then act on these decisions, rapidly putting new plans into action - not just within their organizations, but also with different divisions and trading partners. The speed at which this loop acts determines the value it generates. The more ineffective a company is at this, the more value leaks out.
Each of the core business processes within an enterprise in the value chain runs a DVCM loop. As a result, there is a two-way flow of decisions moving amongst trading partners. Each company sends a clear demand signal to suppliers and a clear supply signal to their customers. Suppliers can notify manufacturers of changes in supply availability, while manufacturers can notify suppliers of changes in customer demand. Unlike legacy ERP systems, DVCM is not a basic voucher processing system. Instead, it is many players working as links in a chain. Certainly, DVCM does not prevent these players from working autonomously within their independent business functions, but with DVCM the players are still empowered by decision collaboration.
And that collaboration is critical, because no business functions in a vacuum. The actions of one company have a ripple effect on its customers and suppliers. The ripples are inevitable, but DVCM can keep them from becoming tidal waves that cause real damage. DVCM channels the ripples by providing advance warning about variability so that participants in the value chain can make the right decisions and respond rapidly.
Making DVCM Happen
Dynamic Value Chain Management is not just a vision. It actually works, and is in practice at a number of innovative companies. The first stage in making DVCM a reality is to lay some groundwork by configuring the value chain. During this stage of what i2 calls the "value chain funnel," businesses make broad, strategic decisions about what their value chains should look like and which participants should be involved. This configuration stage is where businesses can take the first critical steps to reduce complexity. Here they can do series of analyses - of suppliers, of finished SKUs, of bills of materials, of the physical flow of materials through the value chain - that can pinpoint the places to reduce complexity, reduce costs, and help the business achieve velocity in its operations.
Figure 2 The Value Chain Planning Funnel: Configuration, Planning and Execution
This is not to suggest, of course, that reducing complexity implies reducing variety. For example, a business may in fact want to gain market share by offering its customers a variety of finished goods in a number of different configurations. These rich product offerings, which are often produced in lower volumes, configured to order, and specially priced, allow the business to add value and to charge a premium, and these offerings can be an extremely profitable part of a company's strategy. Providing customers with such variety means increasing complexity - increasing the number of parts and suppliers, and adding complexity to BOMs. Such complexity is a given, and absolutely necessary if the company is to achieve its business objectives. The real challenge, then, is to use DVCM within the constraints of the company's business strategy to reduce unnecessary variability and manage the added complexity that is introduced by such a market strategy.
The next stage, the planning phase, narrows the focus of the value chain funnel even further. Here is where businesses decide what products to provide and when. After configuration and planning, the business is ready to execute, secure in the knowledge that strategic decisions don't have to be made on the fly during execution, while products are actually being manufactured or otherwise provided to customers.
For DVCM to work within a business, management must be committed to the process. Just as implementing TQM required educating employees and partners about the broader vision, DVCM requires an educational process both within the business and with its trading partners. This isn't something that can be rolled out in a single, big-bang approach. Instead, implementation should be incremental and prioritized, focusing on areas where the most value can be realized the most rapidly, and the next stage is reached only when the previous stage is fully functional.
An effective DVCM process requires participation from all the trading partners.
But what if partners don't want to participate in DVCM? Perhaps they are protective
of their information and don't want to share it. Perhaps they think that participating
will cost too much. In these situations, DVCM becomes even more critical because
the value chain is subject to even greater
variability and complexity.
Businesses should take what steps they can to manage as much of the value chain as possible, focusing on DVCM principles within their own four walls to improve quality and velocity in their supply chains. Businesses should not wait for partners to adopt the DVCM methodology, but they can encourage partners to adopt it and still recognize benefits. For instance, businesses can measure their own performance within their value chain. In addition, they can measure the performance of their trading partners against commitments, and offer incentives if partners demonstrate reliability or provide early warning of any deviation from reliability.
By using DVCM to transform their value chains, businesses can reap huge benefits.
They can lower their costs because of their ability to make more rapid and strategically
informed and aligned decisions when faced with increasing complexity and the
variability it introduces. They can increase their revenues by timely delivery
of the products that customers really want, not the ones they don't want. They
can shape their own futures the way they want them to be, instead of merely
reacting to the past. With the flexibility and nimbleness DVCM makes possible,
businesses can serve each customer as an individual, and, in the process, realize
enormous value.
